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Press Release
Digital River Announces Positive EBITDA in Q3 and Beats Revenue and Per Share Expectations
Records profitability prior to acquisition related costs for September and increases long-term operating margins by 500 basis points
MINNEAPOLIS, MN, October 24, 2001--Digital River, Inc. (NASDAQ: DRIV), a leading global e-commerce outsource provider, today reported revenue of $14.0 million for the quarter ended September 30, 2001. This represents a year-over-year increase of 84 percent from revenue of $7.6 million in the third quarter of 2000, and a 7 percent increase from revenue of $13.1 million in the second quarter. The net loss prior to goodwill amortization and acquisition related costs was $462,000, or $0.02 per share, in the third quarter. This is a 92 percent, or $0.23 per share, year-over-year improvement from a $0.25 loss per share in the third quarter of last year. This is also a 60 percent improvement from the second quarter net loss of $1.2 million, or $0.05 per share, and significantly better than consensus analyst estimates of a loss of $0.04 per share.
Digital River's solid third quarter financial performance was also marked by two significant company milestones. For the first time since becoming a public company in 1998, Digital River recorded positive earnings before interest, taxes, depreciation and amortization (EBITDA) of $590,000 in the third quarter. Also, September was the first month that Digital River achieved profitability on a company-wide basis, prior to goodwill amortization and acquisition related costs.
"In the third quarter, we not only led the e-commerce outsourcing industry, but also excelled in an environment shaken by the September 11th tragedy," said Joel Ronning, Digital River's CEO. "Through the concerted efforts of our management team and professional staff, we quickly responded to changing market conditions. We proactively rallied our clients to refocus on their businesses, and initiated a series of marketing campaigns that drove site traffic and revenues. Despite a turbulent market and what could have been a threatened quarter, Digital River hit key financial milestones and turned in a record-breaking performance."
Gross margin for the third quarter exceeded 79 percent, a 950 basis point improvement over last year's gross margin. This is also a 300 basis point improvement from the prior quarter.
The net loss for the quarter, including goodwill amortization and acquisition related costs, was $4.4 million, or $0.18 per share, compared to a net loss of $8.1 million or $0.37 per share in the third quarter of 2000. This performance also compares with a net loss of $5.1 million, or $0.21 per share, in the second quarter. At September 30, 2001, cash and investments totaled $25.4 million. The $2.7 million of cash utilized during the quarter is the result of $1.7 million in capital expenditures and the cash used for two recent acquisitions.
"Clearly, these accomplishments point to a strong, growing, well-managed business," said Ronning. "We continue to benefit from the investments we have made in our infrastructure and the operating efficiencies that we have created. Digital River is well-positioned to achieve the profitability goals it has set for the fourth quarter and next year."
For the nine months ended September 30, 2001, revenue totaled $40.1 million, a 90 percent increase from $21.1 million in the same period last year. Through the first nine months of this year, the net loss prior to amortization of goodwill and acquisition related costs was $3.3 million, or $0.14 per share. The net loss, including the amortization of goodwill and acquisition related costs, totaled $15.7 million, or $0.66 per share, compared with a net loss of $32.7 million, or $1.55 per share in the first nine months of 2000.
Taking advantage of the consolidation in the Internet sector, Digital River recently completed two acquisitions that are expected to be mildly accretive to earnings in 2001 and 2002. Digital River acquired substantially all of the assets and related liabilities of Orbit Commerce, a leading e-business outsource provider. In addition, the company acquired the assets of RegSoft, a leader in e-commerce outsourcing services for software publishers and authors. Digital River's agreements with these two companies mark the seventh and eighth acquisitions the company has made in two-and-a-half years.
"Throughout these acquisitions, we have demonstrated expertise in integrating clients, assimilating cultures and consolidating operations to make acquisitions accretive to our bottom line," said Bob Strawman, Digital River's CFO. "We know how to leverage a world-class scalable system and our fixed infrastructure across thousands of clients to generate incremental earnings. We believe that we will continue to benefit from these efficiencies in the future."
Industry-Leading Software and Digital Commerce Services
The Software Services Division generated $10.6 million in revenue for the company in the quarter, an 80 percent improvement from revenue of $5.9 million in the third quarter of 2000. This performance is also a 12 percent increase from revenue of $9.5 million in the second quarter. The division's EBITDA was a positive $2.7 million, or 25 percent of its revenue.
"Because of the data that we have gathered from our more than 10,000 clients and the millions of orders that we processed this year, we are in a unique position to see and respond to Internet trends," said Jay Kerutis, Digital River's president of the Software and Digital Commerce Services Division. "During a critical period in the quarter, we were able to leverage this insight to quickly respond to September's catastrophic events. In the days following the disaster, our associates worked around the clock. We were driving our clients, testing promotions and managing multiple campaigns of over 25 million e-mails that successfully brought transactions back to near normal levels."
Execution of E-Business Services Strategy
The E-Business Services Division generated $3.4 million in revenue for the company in the third quarter, a 100 percent increase from revenue of $1.7 million in the third quarter of 2000. This performance was slightly below revenue of $3.6 million in the second quarter. The division's EBITDA loss was $2.1 million for the quarter, compared to $3.4 million in the third quarter of 2000, and $1.9 million in the second quarter.
The total number of e-business individual client contracts, plus multiple sites resulting from single contracts, and Market Maker installations were 100 on September 30, 2001. This number excludes the thousands of sites that Digital River is managing as a result of the Orbit Commerce acquisition. To support continued growth in its E-Business Division, Digital River plans to leverage its acquisition of Orbit Commerce and maintain the strategic partnerships that Orbit established with Gateway Computers, VeriSign, Cincinnati Bell and others. These large enterprise partners can enable their small business customers to establish e-commerce operations by leveraging Digital River's e-commerce system.
"We have spent the last five years demonstrating our e-commerce expertise, successfully working with small and large software publishing companies in our software division," said Ronning. "With the Orbit acquisition, we plan to leverage that expertise by expanding our market in our e-business division and adding small businesses to the Fortune 1000 and mid-sized manufacturers, distributors and retailers that currently make up our installed client base. With this move, each of our divisions will be able to market and sell a comprehensive e-commerce offering that spans the entire e-commerce vertical, from high-end to low-end."
Future Expectations
In the fourth quarter of 2001, Digital River expects to achieve overall company profitability, generating $0.03 of earnings per share, prior to the amortization of goodwill and acquisition related costs, up from $0.02 in the prior company guidance. Based on third quarter results and the fourth quarter projections, Digital River anticipates a loss per share, prior to goodwill amortization and acquisition costs, of $0.10 per share in 2001. This is nearly a 30 percent improvement from the $0.14 loss per share guidance provided by the company after the second quarter. For 2001, Digital River is increasing its revenue projections to $57.6 million, which is nearly an 85 percent growth rate from 2000. With its current business plan, Digital River believes that excluding future acquisitions, it will exit 2001 with more than $25 million in cash and as a company generating positive cash flows.
In each of the last two quarters, Digital River generated gross margins in excess of its 70-75 percent long-term target. The company now anticipates long-term gross margins to average 78-83 percent, with operating margins of 30-35 percent. This is a 500 basis point increase in operating margins from the company's prior long-term operating model.
In the fourth quarter, the company expects to generate revenue of $17.5 million, a more than 73 percent improvement from the fourth quarter of last year and slightly higher than previous guidance. The e-business segment revenue is projected to increase and comprise approximately 25 percent of revenue in the quarter.
In 2002, Digital River expects revenue to total $80-85 million, an increase of 40-50 percent from 2001. In addition, Digital River expects to generate $10 to $11 million of net earnings prior to amortization of acquisition related expenses. This represents a 35 percent improvement from the current analyst consensus income estimate for next year. The company believes that this performance will result in an earnings per share of $0.35 to $0.38, prior to amortization of acquisition related costs, in 2002.
About Digital River
Founded in 1994, Digital River is a leading global e-commerce outsource provider, offering more than 10,000 companies complete e-commerce systems and services. The company's world-class infrastructure and professional services are proven to grow businesses quickly and profitably while reducing risk. Digital River's commerce services include e-commerce strategy, site development and hosting, order and transaction management, system integration, product fulfillment and returns, e-marketing and customer service. Digital River's clients include Symantec, Fujitsu, 3M, Siemens, Nabisco, Polaris, Major League Baseball, Novell, Autodesk, SONICblue, Adaptec and Staples.com. For more details about Digital River, visit the corporate Web site at www.digitalriver.com or call 952-253-1234.
Digital River will hold a third quarter conference call today at 4:45 p.m. Eastern Daylight Time. To access the call, please dial 877-422-0170, or listen to the webcast at http://drhome.digitalriver.com/livehtml/newsite/dr_invest_000.html. Please go to the investor page to access the call and install any necessary audio software.
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